Tribunal adjusts comparables and deductions for transfer pricing, upholds exclusion of communication charges.

The Tribunal partly allowed the assessee's appeal, directing the exclusion of certain companies from the list of comparables for transfer pricing purposes due to turnover differences and functional dissimilarities. The Tribunal also upheld the exclusion of communication charges from export turnover for deduction under Section 10A, following previous decisions to maintain consistency in tax computations. The Assessing Officer was instructed to re-determine the Arm's Length Price and revise the deduction computation accordingly.

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Issues Involved:
1. Transfer Pricing Issues
2. Exclusion of Communication Charges from Export Turnover for Deduction under Section 10A

Detailed Analysis:

1. Transfer Pricing Issues:

Selection of Comparables:
The primary contention revolves around the selection of certain companies as comparables by the Transfer Pricing Officer (TPO) and upheld by the Dispute Resolution Panel (DRP). The assessee objected to the inclusion of the following companies:

(a) Infosys BPO Ltd., Wipro Ltd. (Segment), HCL Comnet Systems and Services Ltd.:
The assessee argued that these companies have significantly higher turnovers, making them incomparable. The Tribunal agreed, noting the substantial turnover differences and functional dissimilarities, and directed their exclusion from the list of comparables.

(b) Eclerx Services Ltd.:
The assessee contended that Eclerx Services Ltd. is a Knowledge Process Outsourcing (KPO) company with exceptionally high margins, making it functionally different. The Tribunal, citing previous decisions, directed its exclusion due to its high profit margins and KPO nature.

(c) Genesys International Corporation Ltd.:
The assessee argued that Genesys is engaged in diverse activities, including geo-engineering services, making it functionally different. The Tribunal remitted the issue back to the TPO for fresh consideration, emphasizing the need to verify the functional differences and the impact of provision for bad debts.

(d) Accentia Technologies Ltd.:
The assessee objected to Accentia Technologies Ltd. due to exceptional events like mergers and acquisitions during the relevant financial year, impacting its profitability. The Tribunal directed the Assessing Officer (AO) to verify the impact of these events and reconsider the company's comparability.

(e) Cosmic Global Limited:
The assessee argued that Cosmic Global Limited subcontracts its IT-enabled services, making it functionally different. The Tribunal remitted the issue back to the AO/TPO for fresh consideration, emphasizing the need to verify the extent of subcontracting.

(f) Crossdomain Solutions:
The assessee contended that Crossdomain Solutions is a KPO service provider with a brand presence, making it functionally different. The Tribunal, following previous decisions, directed its exclusion from the list of comparables.

(g) Acropetal Technologies Ltd. (SEG):
The assessee argued that Acropetal Technologies Ltd. is primarily engaged in software development and engineering design services, making it functionally different. The Tribunal directed its exclusion, citing the functional dissimilarities with the assessee's IT-enabled services.

Re-determination of ALP:
The Tribunal directed the AO/TPO to re-determine the Arm's Length Price (ALP) considering the directions given regarding the exclusion of the aforementioned companies from the list of comparables.

2. Exclusion of Communication Charges from Export Turnover for Deduction under Section 10A:

Grounds for Exclusion:
The assessee challenged the exclusion of communication charges of Rs. 80,15,215 from the export turnover while computing the deduction under Section 10A of the Income Tax Act. The AO excluded these charges on the grounds that they were attributable to the delivery of products outside India.

Tribunal's Decision:
The Tribunal cited the Hon'ble Bombay High Court's decision in CIT V/s. Gem Plus Jewellery and the Income-tax Appellate Tribunal Chennai Special Bench in ITO V/s. Sak Soft Ltd., which upheld the exclusion of communication charges from both the export turnover and the total turnover to maintain parity. The Tribunal directed the AO to reduce the communication charges from both the export turnover and the total turnover while computing the deduction under Section 10A.

Conclusion:
The assessee's appeal was partly allowed, with specific directions for re-determining the ALP and revising the computation of the deduction under Section 10A. The Tribunal emphasized the need for functional comparability and consistency in the treatment of communication charges for maintaining parity in tax computations.

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